The FOMC minutes for the July/August meeting revealed that support for a new round of quantitative easing in the short-run is rising within the ranks of the Fed. While Bernanke & Co. managed to keep their policy powder untapped last time around,they see three factors still posing major downside risks: the sovereign debt crisis in Europe, a global economic slowdown led by China and other BRICs, and the fiscal cliff, which could result in substantial fiscal contraction and, as the CBO noted on Wednesday, a recession in the U.S.

Markets passed a verdict in the aftermath of the release o, with risk assets rallying and the U.S. dollar sliding. Much of it stemmed from a single sentence toward the end of the minutes:

Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

In other words, the QE3 bomb has been activated, and all the FOMC participants need is somebody to trip over the trigger. In anticipation to the July/August meeting, market players appeared to be expecting some sort of bold action by the Fed, which in turn caused disappointment as Bernanke bluffed and passed the ball to his colleague in Europe. Mario Draghi, head of the ECB, engaged in “verbal intervention” telling investors he would do whatever it takes to end the European sovereign debt crisis, then instructing his staff to draft plans to buy sovereign bonds.

The FOMC minutes released Wednesday revealed that the Fed fears one of three major factors could severely obstruct the tepid U.S. economic recovery. Strains in financial markets as a consequence of intense uncertainty in Europe are a big one, and, as I’ve previously reported, it all comes down to what the ECB and Germany figure out by September. The second one is the potential slowdown in the global economy, which should persist in the immediate-term. But, as BHP Billiton’s management made clear today, China is beginning to ease and preparing aggressive stimulus.

The third and final factor fueling downside risk is also one of the most dangerous: the fiscal cliff. “Sharper-than-anticipated fiscal contraction in the United States,” as the minutes read, could send the world’s largest economy into recession. Bernanke has in repeated occasions asked Congress to get its act together and solve the problem, but with a Presidential election coming in November and a deeply divided political landscape, it is difficult to see Republicans and Democrats reaching an agreement.

President Obama on one side, and Governor Romney, now empowered by his VP-pick Paul Ryan, on the other, have increased the aggressiveness of their rhetoric over the last couple of weeks. The partisan divide seems to have been made even wider by Romney’s VP pick, as Paul Ryan is head of the House Budget Committee and has expressed strong opinions as to how the deficit must be dealt with, which clash head-on with President Obama’s views.

At the end of the day, the Fed responds to a dual mandate which requires that it maintain price stability and foster maximum employment. Prices, as the minutes showed, have remained within their expected targets, with inflation expectations firmly anchored, while actual inflation has declined on the back of cheaper crude oil and gasoline. This gives the Fed room to ease.

Markets seem to have taken their cue from Bernanke and the FOMC, with U.S. equities rallying after the release. Gold jumped, while yields on 10-year Treasuries slid to 1.74%. Shares in major banks like JPMorgan Chase, Citigroup, and Wells Fargo rose on the news, but remained in negative territory.